Current-Asset-Management課件

1、Current Asset Management7Chapter OutlineWhat is current asset managementCash management and its importanceManagement of marketable securitiesAccounts receivable and inventory managementInventory management and policy decisions requiredLiquidity vis-vis returns2What is Current Asset Management?Curren

2、t asset management is essentially an extension of working capital managementIt is concerned with the current assets of a firm (cash, A/R, marketable securities, and inventory)A financial manager needs to remember that the less liquid an asset is, the higher the required return3Cash ManagementFinanci

3、al managers actively attempt to keep cash (non-earning asset) to a minimumIt is critical to have sufficient cash to assuage emergenciesSteps to improve overall profitability of a firm:Minimize cash balancesHave accurate knowledge of when cash moves in and out of the firm4Cash ManagementUse cash budg

4、etsSpeed up collectionsExtend disbursementsMaintain optimum level of cashInvest excess cashLT 7-35Reasons for Holding Cash BalancesTransactions balancesPayments towards planned expensesCompensative balances for banksCompensate a bank for services provided rather than paying directly for themPrecauti

5、onary needsEmergency purposes6Optimum Level of CashHow much to keep in cash? transaction needs?cash flows predictable?borrowing arrangements?interest rates?Keep safety level in cash, invest excessLow-risk, liquid investmentsSavings accountsMoney market fundsTerm depositsTreasury billsUS $ depositsEa

6、rn small return on excess funds LT 7-47Collection and DisbursementsThe financial manager attempts to get maximum use of minimum balances by speeding inflows and slowing outflows.Playing the float: Using the difference in the cash balances shown on the banks records and those shown on the firms recor

7、ds.8Expanded Cash Flow Cycle9Cash Flow CycleCash flow relies on:Payment pattern of customersSpeed at which suppliers and creditors process checksEfficiency of the banking systemCash inflows are driven by sales and influenced by: Type of customersCustomers geographical locationProduct being soldIndus

8、try10Cash Flow Cycle (contd)When the cash balance increases, the extra cash can be Used for various payments to lenders, stockholders, government, etcUsed to invest in marketable securitiesWhen there is a need for cash a firm can:Sell the marketable securitiesBorrow funds from short-term lenders11Fl

9、oatDifference between firms recorded amount and amount credited to the firm by a bankTwo types of float:Mail float: Arises duet to the time it takes to deliver a check.Clearing float: Arises due to the time it takes to clear a check once the payment is madeBoth these floats do not exist anymore due

10、to:Electronic payments Check Clearing for the 21st Century ActCheck Clearing for the 21st Century Act (Check 21) Allows banks and others to electronically process a check12Components of Collection Time Collection time Mailing Processing Availability time delay delay Customer Check Deposit Cash mails

11、 is is is check received made available13The use of float to provide fundsBank Books (usable funds)Corporate Books(amounts actually cleared)Initial amount$ 100,000$ 100,000Deposits+ 1,000,000+ 800,000Cheques 900,000 400,000Balance+ $ 200,000+ $ 500,000+ $300,000 floatPPT 7-114Playing the floatPPT 7-

12、1Bank Books (usable funds)Corporate Books(amounts actually cleared)Initial amount$ 100,000$ 100,000Deposits + 1,000,000+ 800,000Cheques 1,200,000 800,000Balance $ 100,000+ $ 100,000 + $200,000 float* Assumed to remain the same as in Table 7-1.*15Improving Collections and Extending Disbursements Impr

13、oving collection: Setting up multiple collection centers at different locationsAdopt lockbox system for expeditious check clearance at lower costsExtending disbursement:General trend:Speedup processing of incoming checksSlow down payment proceduresExtended disbursement float allows companies to hold

14、 onto their cash balances for as long as possible16Cash Management Network17Cost-Benefit AnalysisAllows companies to analyze the benefits, received by investing on an efficiently maintained cash management program18Electronic Funds TransferFunds are moved between computer terminals without the use o

15、f a checkAutomated clearinghouses (ACH): Transfers information between financial institutions and between accounts using computer tapeInternational fund transfer is carried out through SWIFT (Society for Worldwide Interbank Financial Telecommunications)Uses a proprietary secure messaging systemEach

16、message is encryptedEvery money transaction is authenticated by a code, using smart card technologyAssumes financial liability for the accuracy, completeness, and confidentiality of transaction19Factors influence the choice of marketable securities1. Yield2. Maturity (interest rate risk)3. Minimum i

17、nvestment required4. Safety5. Marketability20An Examination of Yield and Maturity CharacteristicsMarketable securities21Marketable SecuritiesWhen a firm has excess funds, it should be converted from cash into interest-earning securitiesTypes of securities:Treasury bills: Short-term obligations of th

18、e governmentTreasury notes: Government obligations with a maturity of 1-10 yearsFederal agency securities: Offerings of government organizationsCertificate of deposit: Offered by commercial banks, savings, and other financial institutionsCommercial paper: Represents unsecured promissory notes issued

19、 by large business organizationsBankers acceptances: Short-term securities that arise from foreign trade22Types of Short-Term Investments23Reasons for the increase of accounts receivable1. Increasing sales2. Inflation 3. Extend credit terms during recession 24Management of Accounts ReceivableAccount

20、s receivable as an investmentShould be based on the level of return earned equals or exceeds the potential gain from other investmentsCredit policy administration Credit standardsTerms of tradeCollection policy25Credit StandardsDetermine the nature of credit risk based on:Prior records of payment an

21、d financial stability, current net worth, and other related factors5 Cs of credit:CharacterCapitalCapacityConditionsCollateral26Credit Standards (contd)Dun & Bradstreet Information Services (DBIS):Produces business information analysis toolsPublishes reference booksProvides computer access to inform

22、ationThe Data Universal Number System (D-U-N-S) is a unique nine-digit code assigned by DBIS to each business in its information base27Dun & Bradstreet Report An Example28Terms of TradeStated term of credit extension:Has a strong impact on the eventual size of accounts receivable balanceCreates a ne

23、ed for firms to consider the use of cash discounts29Collection PolicyA number if quantitative measures applied to asses credit policyAverage collection periodRatio of bad debts to credit sales Aging of accounts receivable30An Actual Credit DecisionAccounts receivable = Sales = $10,000 = $1,667 Turno

24、ver 6 Brings together various elements of accounts receivable management31Inventory ManagementInventory has three basic categories:Raw materialsWork in progressFinished goodsAmount of inventory is affected by sales, production, and economic conditionsInventory is the least of liquid assets should pr

25、ovide the highest yield 32Level versus Seasonal ProductionLevel productionMaximum efficiency in manpower and machinery usageMay result in high inventory buildupSeasonal productionEliminates inventory buildup problemsMay result in unused capacity during slack periodsMay result in overtime labor charg

26、es and overused equipment repair charges33Inventory Policy in Inflation (and Deflation)Inventory position can be protected in an environment of price instability by:Taking moderate inventory positionsHedging with a futures contract to sell at a stipulated price some months from nowRapid price moveme

27、nts in inventory may also have a major impact on the reported income of the firm34The Inventory Decision ModelCarrying costsInterest on funds tied up in inventoryCost of warehouse space, insurance premiums, and material handling expensesImplicit cost associated with the risk of obsolescence and peri

28、sh-ability Ordering costsCost of orderingCost of processing inventory into stock35Determining the Optimum Inventory Level36Economic Ordering QuantityEOQ = 2SO ; CWhere,S = Total sales in unitsO = Ordering cost for each orderC = Carrying cost per unit in dollarsAssuming:EOQ = 2SO = 2 X 2,000 X $8U =

29、$32,000 = 160,000 C $0.20 $0.20 = 400 units37Safety Stocks and Stock OutsStock out occurs when a firm is:Out of a specific inventory itemUnable to sell or deliver the productSafety stock reduces such risks Increases cost of inventory due to a rise in carrying costs This cost should be offset by:Elim

30、inating lost profits due to stockouts Increased profits from unexpected orders38Safety Stocks and Stock Outs (contd)Assuming that;Average inventory = EOQ + Safety stock 2Average inventory = 400 + 50 2The inventory carrying costs will now increase by $50Carrying costs = Average inventory in units Car

31、rying cost per unit= 250 $0.20 = $5039Just-in-Time Inventory ManagementBasic requirements for JIT:Quality production that continually satisfies customer requirementsClose ties between suppliers, manufactures, and customersMinimization of the level of inventoryCost Savings from lower inventory:On ave

32、rage, JIT has reduced inventory to sales ratio by 10% over the last decade40Just-In- Time Inventory SystemsFeaturesMinimum levels of inventory Orders in small lot sizes Computerized order and inventory systemsElectronic data interchangeShort delivery timesSmall number of suppliersQuality control pro

33、gramsBenefitsLower carrying costsAutomatic orderingFewer accounting errorsLower quality control costsElimination of waste LT 7-1041Sources of Short-Term Financing8Chapter 8 - OutlineSources of Short-Term FinancingTrade CreditNet Credit PositionTypes of Bank LoansCorporate and Foreign Borrowing Accou

34、nts Receivable FinancingInventory FinancingLonger-term Loans43Sources of Short-Term FinancingThere are various sources of short-term funds available to a firm:Trade Credit from SuppliersBank LoansCorporate Promissory NotesBankers AcceptancesForeign BorrowingLoans Against Receivables and Inventory44T

35、rade CreditApproximately 40 percent of short-term financing is in the form of accounts payable or trade creditAccounts payableIs a Spontaneous source of fundsGrows as the business expandsContracts when business declines45Payment PeriodTrade credit is usually extended for 3060 days Extending the paym

36、ent period to an unacceptable period results in:Alienate suppliers Diminished ratings with credit bureausMajor variable in determining the payment period:The possible existence of a cash discount46Cash Discount PolicyAllows reduction in price if payment is made within a specified time periodExample:

37、 A 2/10, net 30 cash discount means: Reduction of 2% if funds are remitted 10 days after billingFailure to do so means full payment of amount by the 30th day47Net-Credit PositionDetermined by examining the difference between accounts receivable and accounts payablePositive if accounts receivable is

38、greater than accounts payable and vice versa Larger firms tend to be net providers of trade credit (relatively high receivables)Smaller firms in the relatively user position (relatively high payables)48Bank CreditProvide self-liquidating loansUse of funds ensures a built-in or automatic repayment sc

39、hemeChanges in the banking sector today:Centered around the concept of full service bankingExpanded internationally to accommodate world trade and international corporationsDeregulation has created greater competition among other financial institutions49Prime Rate and LIBORPrime rateRate a bank char

40、ges to its most creditworthy customersIncreases as a customers credit risk increasesLIBOR (London Interbank Offered Rate)Rate offered to companies:Having an international presenceAbility to use the London Eurodollar market for loans 50Prime Rate versus LIBOR on U.S. Dollar Deposits51Compensating Bal

41、ancesA fee charged by the bank for services rendered or an average minimum account balanceWhen interest rates are lower, the compensating balance risesRequired account balance computed on the basis of:Percentage of customer loans outstandingPercentage of bank commitments towards future loans to a gi

42、ven account 52Maturity ProvisionsTerm loanCredit is extended for one to seven yearsLoan is usually repaid in monthly or quarterly installmentsOnly superior credit applicants, qualifyInterest rate fluctuates with market conditionsInterest rate may be tied to the prime rate or LIBOR53Cost of Commercia

43、l Bank FinancingEffective interest on a loan is based on the:Loan amountDollar interest paidLength of the loanMethod of repaymentDiscounted loan interest is deducted in advance effective rate increasesEffective rate = Interest Days in the year (360) Principal-interest Days loan is outstanding54Inter

44、est Costs with Compensating BalancesAssuming that 6% is the stated annual rate and that 20% compensating balance is required;Effective rate with = Interest compensating balances (1 c) = 6% = 7.5% (1 0.2)When dollar amounts are used and the stated rate is not known, the following can be used for comp

45、utation: Days in aEffective rate with = Interest year (360) compensating balances Principal Compensating Days loan is balance in dollars outstanding 55Rate on Installment LoansInstallment loans require a series of equal payments over the period of the loanFederal legislation prohibits a misrepresent

46、ation of interest rates, however this may be misused Effective rate on installment loan = 2 Annual no. of payments Interest (Total no. of payments + 1) Principal56Annual Percentage RateTruth in Lending Act of 1968 requires the actual APR to be given to the borrowerAnnual percentage rule:Protects unw

47、ary consumer from paying more than the stated rateRequires the use of the actuarial method of compounded interest during computationLender must calculate interest for the period on the outstanding loan balance at the beginning of the periodIt is based on the assumptions of amortization57The Credit C

48、runch PhenomenonThe Federal Reserve tightens the growth in the money supply to combat inflation the affect: Decrease in funds to be lent and an increase in interest ratesIncrease in demand for funds to carry inflation-laden inventory and receivablesMassive withdrawals of savings deposits at banking

49、and thrift institutions, fuelled by the search for higher returnsCredit conditions can change dramatically and suddenly due to:Unexpected defaultsEconomic recessionsChanges in monetary policyOther economic setbacks58Financing Through Commercial PaperShort-term, unsecured promissory notes issued to t

50、he publicFinance paper / direct paperDealer paperAsset-backed commercial paperBook-entry transactionsComputerized handling of commercial paper, where no actual certificate is created 59Total Commercial Paper Outstanding60Advantages of Commercial PaperMay be issued at below the prime interest rateNo

51、associated compensating balance requirements Associated prestige for the firm to float their paper in an elite market61Disadvantages of Commercial PaperMany lenders have become risk-averse post a multitude of bankruptciesFirms with downgraded credit rating do not have access to this marketThe funds

52、generation associated with this is less predictableLacks the degree of commitment and loyalty associated with bank loans62Foreign BorrowingEurodollar loanDenominated in dollars and made by foreign bank holding dollar depositsShort-term to intermediate terms in maturityLIBOR is the base interest paid

53、 on loans for companies of the highest qualityOne approach borrow from international banks in foreign currencyBorrowing firm may suffer currency risk63Use of Collateral in Short-Term FinancingSecured credit arrangement when: Credit rating of the borrower is too lowNeed for funds is very highPrimary

54、concern whether the borrower can generate enough cash flow to liquidate the loan when dueUniform Commercial CodeStandardizes and simplifies the procedures for establishing security against a loan 64Accounts Receivable FinancingIncludes:Pledging accounts receivablesFactoring or an outright sale of re

55、ceivablesAdvantage:Permits borrowing to be tied directly to the level of asset expansion at any point of timeDisadvantage:Relatively expensive method of acquiring funds65Pledging Accounts ReceivablesLending firm decides on the receivables that it will use as a collateralLoan percentage depends on th

56、e firms:The financial strengthThe creditworthinessInterest rate is well above the prime rateComputed against the balance outstanding66Factoring ReceivablesReceivables are sold outright to the finance companyFactoring firms do not have recourse against the seller of the receivablesFinance companies m

57、ay do all or part of the credit analysis to ensure the quality of the accountsFactoring firm is:Absorbing risk for which a fee is collectedActually advancing funds to the seller paid a lending rate67Factoring Receivables ExampleIf $100,000 a month is processed at a 1% commission, and a 12% annual bo

58、rrowing rate, the total effective cost is computed on an annual basis 1%.Commission 1%.Interest for one month (12% annual/12) 2%.Total fee monthly 2%.Monthly X 12 = 24% annual rateThe rate may not be considered high due to factors of risk transfer, as well as early receipt of fundsIt also allows the

59、 firm to pass on much of the credit-checking cost to the factor68Asset Backed Public OfferingThere is an increasing trend in public offerings of security backed by receivables as collateralInterest paid to the owners is tax freeAdvantages to the firm:Immediate cash flowHigh credit rating of AA or betterProvides Corporate liquidityShort-term financingDisadvantage to the buyer:Risk associated receivable